March 2019 Investor Report

Published: March 25, 2019Updated: May 15, 2019

March was another strong month for
our portfolios. Market performance was initially concerning, as we saw the
S&P 500 down more than 2.5 percent during the first week of March. We did
see a rebound as the month progressed and the Federal Reserve completed its dovish
turn. Federal Reserve Chairman Jerome Powell provided color on a new course of
action where the Federal Open Market Committee will not plan to raise interest
rates at all in 2019 and has only one increased planned in 2020. This is a
remarkable reversal in policy from last fall, when the Federal Reserve hinted
at three rate increases for 2019 alone. The other action by the Fed was the
early termination of the “balance sheet normalization” program. For the past two
years, the Federal Reserve had been slowly unwinding the Quantative Easing
programs of the preceding ten years. Instead of accelerating that process, the
Federal Reserve has made it apparent that asset markets will continue to
provide capital with lower interest rates for the foreseeable future. While
this may create asset bubbles in the intermediate future, the short-term
implications are advantageous. All asset classes should benefit from the continuing
availability of cheaper capital. Fixed income investments will be major
beneficiaries, with some effects already palpable. For example, the ten-year
United States Treasury bill has fallen from 2.63 percent to 2.40 percent in the
two weeks since the March Federal Reserve board meeting. This is a huge move in
such a short period of time. In response to this huge drop, you may have heard
that the three-month US Treasury note yielded more than the ten-year note—which
has not occurred since 2007. Many believe this yield curve inversion is a
guarantee of a forthcoming recession. We are not forecasting a recession this
year.

Please review the following updates from some of the existing
positions that we manage.

BNCCorp Inc.- (BNCC): One of our longer-standing equity positions
looks to be preparing to be acquired, as we forecasted previously. On March 15,
BNCCorp’s largest shareholder (9.9 percent), PL Capital, announced that they would
propose a proxy vote to capture a board seat and ask the shareholders to vote
on selling the company. We have been waiting for PL Capital to join Rangeley
Capital (the hedge fund sponsor who piqued our interest in BNCCorp) and M3
Funds (a fund manager in Utah specializing in regional banks) in asking the board
to implement a sale process. While some in management, including CEO Tim Franz,
have opposed a sale in the past, we believe strongly that PL Capital’s capture
of a second board seat, in combination with the remaining activist
shareholders, will ultimately result in completion of a sale. As a whole, GCWM
controls approximately one percent of the shares outstanding. While this does not
sound like a lot, for publicly traded companies, it is a material amount. On
March 26 we drafted a letter to the Board of BNCC encouraging them to move
forward to undertake a determination of its valuation. BNCC is well-positioned
to sell and its three largest shareholders (totaling 29 percent of the shares
outstanding) all agree that a sale should occur. The Federal Reserve’s recent
decision to scale back interest rate increases has helped the BNCCorp’s
underlying asset base of long-term US Treasuries notes. As the long end of the
curve has moved lower, the value of the assets have improved (the inverse
relationship between yield and bond prices). The bank also holds an extremely
strong deposit base, both in size and consistency. We believe this will ensure
interest in the North Dakota-based bank among prospective buyers. The current
tangible book value of the bank is approximately $24 per share; however, in a
take-out situation, one could expect around $35 per share. There is a bonus
that the take-out premium could reach the upper-$30s to $40 per share if there are
multiple parties looking to acquire BNCC’s attractive deposit base. We are very
confident in the sellability of BNCCorp.

Exterran Partners Bond due April 2021 – (CUSIP: 30227CAB3): Exterran
announced that it is calling our 2021 bonds early. The parent company raised
$500 million in a private offering early in March and the proceeds of that sale
were intended to retire our paper and some of the revolving credit facility. It
was a solid investment for us one that earlier clients focused on income enjoyed.
The bond price moved higher with the improving credit. It seems the recent
growth of investment in natural gas compression service companies is not
slowing anytime soon.